How to Minimise Capital Gains Tax with Small Business CGT Concessions
When you sell a business asset, Capital Gains Tax (CGT) can take a significant portion of your capital gain. Many small business owners find the idea of paying capital gains tax daunting, especially when they have worked hard to grow their business. The good news is, under Australian tax law, there are small business CGT concessions designed to help small businesses reduce the tax they pay on capital gains. Understanding how to claim CGT concessions and apply the right strategies can make a real difference to your tax outcomes and your future plans.
Understanding Small Business CGT Concessions
Small business CGT concessions allow eligible business owners to reduce the capital gains tax owed when selling business assets. These concessions are set out in Australian tax law.
Before claiming a CGT concession, you need to understand the available options and how each one works. The Australian Taxation Office lists four main types of small business CGT concessions for those who qualify.
The Four Types of Small Business CGT Concessions
15-Year Exemption
If you have owned an active asset for at least a 15-year period, are aged 55 or over, and are retiring or permanently incapacitated, you can disregard the entire capital gain. This means you pay no capital gains tax on the sale of the asset, provided you meet the basic conditions and any additional requirements.
50% Active Asset Reduction
This concession allows you to reduce your capital gain by 50% if the asset is an active asset. You may also be eligible for the general CGT discount, which can further reduce the assessable income from the capital gain.
Retirement Exemption
The small business retirement exemption lets you disregard capital gains up to a lifetime limit of $500,000. If you are under 55, the exempt amount must be paid into your superannuation fund. If you are 55 or older, you can choose to keep the money or contribute it to superannuation.
Small Business Rollover
You can defer paying Capital Gains Tax if you acquire a replacement asset or make improvements to an existing asset within a certain timeframe (usually two years). This means the capital gain is not included in your assessable income until a later CGT event occurs.
Are You Eligible for Small Business CGT Concessions?
Before you claim CGT concessions, you must check if your small business meets the eligibility criteria. Getting this right is essential for small business owners who want to avoid unexpected tax bills or issues with the Australian Taxation Office.
Basic Eligibility Criteria
To access the small business CGT concessions, you must satisfy one of these basic conditions:
$2 Million Aggregated Turnover Test
Your business’s aggregated turnover (including connected entities and affiliates) must be less than $2 million for the income year.
Maximum Net Asset Value Test
The total net assets of your business, plus those of any connected entity or affiliate, must be less than $6 million just before the CGT event.
The asset you are selling must also pass the active asset test.
What is an Active Asset?
An active asset is a business asset that you have owned and used in your business (or by a connected entity) for at least half the ownership period, or for at least 7.5 years if owned for 15 years or more. Active assets include property, goodwill, and other assets used in your business, but not personal assets or depreciating assets used mainly for personal purposes.
Some assets don’t qualify as active assets, such as those mainly used to earn rent, interest, or royalties, or shares in a company or trust that don’t meet the 80% active asset test.
Strategies to Maximise Your CGT Concessions
With a clear understanding of the available concessions and eligibility criteria, let’s look at how small business owners can maximise their tax outcomes when a CGT event occurs.
Planning for the 15-Year Exemption
The 15-year exemption is the most generous small business CGT concession. If you are close to meeting the 15-year ownership period or approaching retirement age, it may be worth waiting to sell your active asset. For example, if you’re 54 and have owned your business asset for 15 years, waiting until you turn 55 and retire could mean you pay no capital gains tax at all on the sale.
Combining Multiple Concessions
You can often combine various concessions to reduce your capital gain further. The 15-year exemption stands alone, but the other small business CGT concessions can be used together in a specific order.
For example, if you sell an active asset for a capital gain of $200,000:
- Apply the 50% general CGT discount if you have owned the asset for more than 12 months ($100,000).
- Apply the 50% active asset reduction ($50,000).
- Use the retirement exemption (up to your lifetime limit of $500,000), which could reduce your taxable capital gain to zero.
This approach can help you pay less tax and keep more of your money for retirement, reinvestment, or other personal goals.
Using the Retirement Exemption Effectively
The small business retirement exemption allows you to disregard up to $500,000 of capital gains over your lifetime. If you are under 55, the exempt amount must be paid into your superannuation fund, which does not count towards your non-concessional contributions cap but does count towards your CGT cap amount. If you are 55 or older, you can choose to take the payment as cash or contribute it to superannuation for future tax benefits.
Common Mistakes to Avoid
Understanding what not to do is just as important as knowing the right strategies. Here are some common mistakes small business owners make when claiming CGT small business concessions.
Eligibility Errors
The Australian Taxation Office pays close attention to eligibility. Common mistakes include:
- Not carrying on a business or not meeting the definition of a small business entity
- Incorrectly calculating aggregated turnover or net assets
- Failing to meet the active asset test or misunderstanding what qualifies as a business asset
Keeping good records and seeking tax advice can help you avoid these mistakes and ensure you are eligible to claim the concessions.
Calculation Mistakes
Even if you are eligible, errors in calculation can affect your tax outcomes. Mistakes include:
- Misapplying the rules to shares, replacement assets, or interests in a company or trust
- Using the wrong dates for ownership period or CGT events
- Applying concessions in the wrong order
- Incorrectly calculating the cost base or active asset percentage
Conclusion
Small business CGT concessions offer valuable opportunities for small business owners to reduce their capital gains tax when selling active assets. By understanding the different types of concessions, meeting the eligibility criteria, and planning your sale, you can improve your tax outcomes and keep more of your funds for your future.
Remember, planning ahead and seeking advice from a professional can make a real difference, especially when dealing with capital gains, replacement assets, or the small business retirement exemption.
